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Section 62(1) (b) of the Companies Act, 2013 and SEBI (ESOS and ESPS) Guidelines, 1999, governs the Employee Stock Option Plan, commonly known as ESOP. An ESOP is an employee incentive plan utilized by the companies to offer its employees to purchase a stake in the company at a predetermined price (discounted market price). This plan has multi-fold motives like ownership of work, acquiring talent, employee retention, etc.
Accountability
Helps the company to develop a sense of ownership in its employees.
Talent acquisition
It helps in acquiring new talent and retaining them.
Diversification
It helps maintain diversification of funds
Deduction
It allows existing owners to sell their stock without paying capital gain tax.
Liquidity
Further, it helps the exiting owners easily sell their shares to an ESOP, which otherwise can be difficult in an open market.
Safeguard Employees
In the event of a company's acquisition by a competitor, ESOPs safeguard the interest of existing employees. Being buyers, they can carry on the company’s operations without concern for restructuring and reorganization after the takeover.
A Company offers ESOPs to its following employees:
• A company's full-time directors
• Permanent employees
• Non-permanent (exclusively working) employees
Once opted, shares are assigned to the employee's account as per their remuneration level.
The key feature of the newly notified SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 was to make ESOPs more inclusive. The two salient changes were:
1. Removal of the word “permanent” from the definition of an employee-
The change gives companies the adaptability to offer ESOPS to those non-permanent employees who work exclusively work for the company. This significant change will immensely help contract employees and various other types of non-permanent employees.
2. Addition of the terms 'associate' and ‘group’-
The change will help the companies to offer the benefits of ESOPS to its associates and give relaxation to group companies.
A company may offer Share Based Employee Benefit Schemes through two routes
1. Equity Route-
This route allows a company to issue equity shares of the company to the employees as and when they practice the choice.
2. Trust Route-
Through this route, a company issues shares to its Employee Welfare Trust for the company to distribute ESOP among employees upon exercise of choices.
There are no tax consequences for awarding an ESOP to a promising candidate. However, if expenses are incurred in the ESOP, those expenses qualify as tax deductible expenses against business income.
If an employee makes a profit after selling a stock, it is considered a capital gain. If the shares are sold within a year, a 15% capital gains tax is payable, just like any other share purchase or sale.
Capital gains of one year or more are subject to tax of 10% if there is no price indexation benefit and 20% if there is price indexation.
Note - Currently, all the listed companies are regulated by the SEBI (ESOS and ESPS) Guidelines, 1999, and all the unlisted companies are regulated by Rule 12 of Companies (Share Capital and Debenture) Rules, 2014.
ESOPs allow employees to buy company stock at a discounted price, usually at a price lower than the current market value. The employee can exercise this option at a later date, often after a vesting period, which is the time period an employee has to wait before they can exercise the option.
There may be restrictions on selling ESOPs, such as a holding period before the stock can be sold or limits on the number of shares that can be sold at one time. These restrictions can vary depending on the company's plan.
The rights to the ESOPs may be forfeited if an employee leaves the company before the vesting period. In some cases, the employee may be able to sell the stock back to the company or transfer the stock to another employee.
No, participation in an ESOP plan is usually voluntary and an employee can choose whether or not to participate in the plan.
ESOPs can benefit the company by providing a way to attract, retain and motivate key employees. Additionally, ESOPs can provide a way for companies to raise capital and align the interests of employees with the company's success.
ESOPs are valued based on the fair market value of the stock at the time of the grant. The fair market value is usually determined by an independent valuation firm.